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Difficulty: MediumProhibited Market Manipulation and Fraudulent Practices

A trader simultaneously places matching buy and sell orders for the same equity security across two separate accounts under common beneficial ownership, generating reported transaction volume without any actual shift in ownership control. Which of the following statements correctly identifies this prohibited market practice and its status under federal securities laws?

  1. The transaction represents wash trading, an illegal manipulative practice that deceives the market by creating a false impression of active trading volume.Answer
  2. B
    The transaction represents spoofing, which occurs when non-bona fide orders are entered and rapidly canceled before execution to manipulate market prices.
  3. C
    The transaction represents wash trading, which is purely an internal self-regulatory organization (SRO) rule violation and falls outside the fraud jurisdiction of the Securities and Exchange Commission (SEC).
  4. D
    The transaction represents permissible principal trading, provided the firm acts as a dealer executing trades from its own inventory rather than as a broker charging a commission.

Answer

The transaction represents wash trading, an illegal manipulative practice that deceives the market by creating a false impression of active trading volume.
The correct answer identifies the conduct as wash trading. Wash trading occurs when matching buy and sell orders are entered for a security without any change in beneficial ownership, creating a false appearance of trading activity and market demand in violation of federal anti-fraud laws.

Step-by-Step Solution

1
Analyze the trading activity described in the scenario.
The scenario describes entering matched buy and sell orders across accounts under common control where transactions execute but no beneficial ownership changes.
Identifying whether beneficial ownership changes occurs helps distinguish wash trading from other trading practices.
2
Compare the activity against defined prohibited securities practices.
Executing matched transactions with no change in beneficial ownership to simulate market activity is defined as wash trading.
Spoofing involves non-executed, canceled orders; wash trading involves executed transactions that lack real economic substance.
3
Evaluate the regulatory classification under federal securities laws.
Wash trading constitutes fraudulent market manipulation under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, as well as FINRA anti-manipulation rules.
Both the SEC (federal statutory regulator) and SROs enforce strict prohibitions against market manipulation.

Key Concept

Prohibited Market Manipulation (Wash Trading)
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Topics

Prohibited Market Manipulation and Fraudulent Practices